Month: September 2016

A new ballot measure being considered by voters in Washington State, officially referred to a Initiative Measure 1491, would allow authorities to seize guns from people considered “significantly more likely to commit violence toward themselves or others in the near future.”  The legislation would allow authorities with a court order to seize an individual’s guns for a period of up to 1 year.  Under the measure, gun owners would have the right to appeal a court order to have their guns returned but would have no ability to block the upfront confiscation.

The full text of Initiative Measure 1491 is included at the end of this post but below are a couple of key excerpts:

This act is designed to temporarily prevent individuals who are at high risk of harming themselves or others from accessing firearms by allowing family, household members, and police to obtain a court order when there is demonstrated evidence that the person poses a significant danger, including danger as a result of a dangerous mental health crisis or violent behavior.

 

Studies show that individuals who engage in certain dangerous behaviors are significantly more likely to commit violence toward themselves or others in the near future. These behaviors, which can include other acts or threats of violence, self-harm, or the abuse of drugs or alcohol, are warning signs that the person may soon commit an act of violence.

 

Individuals who pose a danger to themselves or others often exhibit signs that alert family, household members, or law enforcement to the threat. Many mass shooters displayed warning signs prior to their killings, but federal and state laws provided no clear legal process to suspend the shooters’ access to guns, even temporarily.

 

According to the Wall Street Journal, if the measure passes, Washington would become the second state after California to allow family members and police to petition a judge to take guns from a person considered a danger. Connecticut, Indiana and Texas have similar laws, but only police can ask a judge to do so.

Aside from all the obvious issues surrounding unreasonable seizures of personal property, another key issue with the bill is the broad definition of people who can petition authorities to confiscate someone’s guns.  Per the measure’s definition of “Family or Household Member”, any disgruntled former “dating partner” could allege mental instability and have someone’s personal property confiscated as a form of retribution.  

“Family or household member” means, with respect to a respondent, any: (a) Person related by blood, marriage, or adoption to the respondent; (b) Dating partners of the respondent; (c) Person who has a child in common with the respondent, regardless of whether such person has been married to the respondent or has lived together with the respondent at any time; (d) Person who resides or has resided with the respondent within the past year; (e) Domestic partner of the respondent; (f) Person who has a biological or legal parent-child relationship with the respondent, including stepparents and stepchildren and grandparents and grandchildren; and (g) Person who is acting or has acted as the respondent’s legal guardian.

While the WSJ has alleged that the bill has bipartisan support, the state’s Republican Party and gun-right’s groups are slightly less “enthusiastic” with the Washington State Rifle and Pistol Association saying “it’s just an excuse to go after guns.”

The state Republican Party has yet to take a position on the initiative, and Ms. Hutchison said she doesn’t know if it is a solution.

 

“That’s something that sounds very good on the surface,” said Joe Waldron, legislative chairman for the Washington State Rifle and Pistol Association. “It’s just an excuse to go after guns.”

 

Mr. Waldron said he is concerned that the measure would deprive gun owners of their constitutional rights, including due process and protections against unreasonable search and seizure.

What are the chances this bill has any impact at all on violent crime in the state of Washington?

 

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One of the key themes that have emerged in the past year is that, having loaded up their balance sheets with tens of trillions in various assets, central banks are “running out of road.” While it is a topic extensively discussed on these pages, going all the way back to 2014, a good summary of the practical limitations on central banks comes from the following series of charts from Deutsche Bank.

The first slide looks at the bond transmission mechanism, namely that central banks have become increasingly aware of the adverse impact of low bond yields on financial sector profitability; another aspect is that European pension liabilities as a % of market cap are at a 10-year high – and above the levels they reached in 2008, when the European market cap was at half the current level. This means that absent an independent rise in inflation expectations, central banks’ attempts to push up nominal bond yields (via less QE or faster hikes) risks leading to higher real bond yields as well; the implication is that equities tend to de-rate when real bond yields rise (i.e. the discount rate increases).

There is a limitation from the standpoint of markets as well: European 12-month forward P/E, at 14.9x, is around 20% above its 10-year average; DB notes that its P/E model suggests that this deviation is fully accounted for by the fact that real bond yields are 180bps below their 10-year average; more troubling is the admission that any removal of monetary accommodation would likely lead to a sharp rise in credit spreads to reflect the deterioration in fundamentals (with default rates now at 5.7%), while equity strategist note that accommodative monetary policy has driven aggregate bond and equity valuations to the highest level since 1800

In the third slide, DB points out that while equities would likely react positively to any rise in nominal bond yields driven by higher inflation expectations (rather than by higher real bond yields), underlying inflation is only likely to accelerate if growth accelerates to be clearly above potential (i.e. the output gap closes). Meanwhile, weakening growth momentum in the US points to downside risks for inflation, and that since the Chinese RMB is still around 10% overvalued – and any renewed devaluation is likely to weigh on DM inflation expectations.

* * *

Ok fine, central banks are “running out of road”, however at the same time they are terrified to rip (or even peel) the band-aid off. This has put the system in an unstable equilibrium: on one hand, central bankers – as even they admit – need to hand over the growth impulse over to governments, yet on the other hand, they terrified of even the smallest change to the status quo as they know they may undo some 7 years of “wealth effect” creation overnight.

How much longer can this charade continue?

While many would be quick to answer “indefinitely” that is not true, because with every bond, ETF or stock, purchased by central bankers they come to the point where they either monetize the entire lot, or they increasingly impair the functioning of the capital markets (just ask the dozens of marquee hedge funds that have shuttered in recent years).

Luckily, in a recent analysis, Ray Dalio’s Bridgewater asked precisely this question, and even better, provided the answer to how much time is left until both the ECB and BOJ hit the limits on their existing programs.

As the chart below shows, assuming no changes to existing programs, the ECB and the BOJ, the two central banks most actively monetizing debt currently, have 8 and 26 months respectively, if they do no changes to their programs.

However, if incremental easing is layered on, like expanding the scope of their bond buying programs or purchasing equities even more aggressively, the total rises substantially. The final answer: 68 months, or just above 5 and a half years,  in the case of the ECB, were it to steamroll all political opposition and monetize virtually every possible bond (and 20% of the equity market), and 48 months, or 4 years, in the case of the BOJ.

Which means for those market participants who have already torn most of their hair out from participating in a centrally planned “market” where nothing makes sense, get ready because, the insanity may last another 4 or 5 years longer…

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Earlier today we noted that Wells Fargo’s board was actively considering whether to claw back pay from former retail-banking head Carrie Tolstedt as well as from Chief Executive John Stumpf.  Now, just a few short hours later it looks like we have our answer with a Special Committee of Independent Directors announcing that they have hired Sherman Sterling as counsel to conduct a thorough review of the bank’s retail banking sales practices and that both Stumpf and Tolstedt will be forfeiting salary, stocks options and 2016 bonuses. 

More specifically, CEO John Stumpf will forfeit unvested equity awards valued at approximately $41mm, will forgo salary during the Special Committee’s investigation and will not receive a bonus for 2016. 

Meanwhile, Carrie Tolstedt, who was head of community banking before recently departing, will forfeit all of her outstanding unvested equity awards valued at $19m, will not be paid a severance and will not receive any retirement enhancements in connection with her separation from the Company.  Tolstedt has also agreed that she will not exercise her outstanding options during the course of the investigation.

As mentioned above, Wells Fargo’s board formed a Special Committee of Independent Directors that will lead a thorough investigation into the company’s retail banking sales practices with the assistance of independent counsel Shearman & Sterling.  Stephen Sanger, Lead Independent Director, made clear that additional compensation may be clawed back if deemed appropriate and that “other employment-related action” would be taken as necessary.

“We are deeply concerned by these matters, and we are committed to ensuring that all aspects of the Company’s business are conducted with integrity, transparency, and oversight. We will conduct this investigation with the diligence it deserves — and will follow the facts wherever they lead. Our thousands of outstanding team members and millions of loyal customers and shareholders deserve no less. Based on the results of the investigation, the Independent Members of the Board will take such other actions as they collectively deem appropriate, which may include further compensation actions before any additional equity awards vest or bonus decisions are made early next year, clawbacks of compensation already paid out, and other employment-related actions. We will proceed with a sense of urgency but will take the time we need to conduct a thorough investigation. We will then take all appropriate actions to reinforce the right culture and ensure that lessons are learned, misconduct is addressed, and systems and processes are improved so there can be no repetition of similar conduct.”

And with that it looks as though Elizabeth Warren has won round 1.

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Authored by Bonner & Partner's Bill Bonner (annotated by Acting-Man's Pater Tenebrarum),

Largest Theft in History

As expected, Ms. Yellen smiled last week, announcing no change to the Fed’s extraordinary policies. For the last eight years, she has been aiding and abetting the largest theft in history.

 

Asset valuations are not outside of historical norms, particularly if one disregards the past 5,000 years.

Cartoon by Bob Rich

Thanks to ZIRP (zero-interest-rate policy) and QE (quantitative easing), every year, about $300 billion is transferred from largely middle-class savers to largely better-off speculators, financial asset owners, and the biggest borrowers during that period – corporations and the government.

The financial press, nevertheless, finds something vaguely heroic about enabling the grandest larceny ever. Bloomberg:

“Federal Reserve Chair Janet Yellen braved mounting opposition inside and outside the U.S. central bank and delayed an interest-rate increase again to give the economy more room to run.”

The U.S. economy is barely limping along. As we noted last week, when you adjust nominal GDP growth by a more accurate measure of inflation – David Stockman’s “Flyover CPI” – you see that the economy is actually in recession. Room to run? It is backing up!

Bloomberg continues its brain-dead coverage:

While agreeing that the case for a rate rise had strengthened, Yellen on Wednesday argued that it made sense to put off a move for now amid signs that discouraged Americans who dropped out of the labor market are returning and looking for work.

“The economy has a little more room to run than might have been previously thought”, Yellen told a press conference in Washington after the Fed’s two-day meeting, as she explained the decision to keep rates on hold. “That’s good news.”

 

We have numerous reservations about GDP as a measure of economic growth, but it will do for the purpose of showing the long term trend in output growth. It is worth noting that this downshift has occurred in tandem with accelerating credit and money supply growth. While there are other factors in play as well (such as the inexorable increase in regulations), this outcome is in line with Austrian business cycle theory, which posits that  booms driven by credit expansion ultimately lead to capital consumption. Over time the structural damage to the economy evidently adds up – click to enlarge.

 

Voodoo Trade

We listened to Ms. Yellen’s remarks. She sounded like a well-trained functionary, a technician. Lots of economic mumbo-jumbo. Academic phrases. Latinate words and passive sentences.

She might have made a good doctor, we thought. Or maybe a decent metallurgist. In an honest métier, she might have been able to hold her head up high.  Instead, the poor woman is condemned to ply her voodoo trade, pretending that it is based on science, and feigning that it improved the economy.

Pity the economist without a sense of humor. His head must ache when he hears Ms. Yellen talk. His heart must break when he sees his profession brought to ridicule by its most prominent practitioners.

His gloom must deepen into a profound darkness, as he watches the world’s No. 1 economy manipulated by nincompoops and scoundrels. Worse, if he expects any kind of career, fame, or fortune – he must join them!

 

Modern economics in a nutshell… ever since central planning and interventionism have taken center stage, economic science has adapted to serve this need (since he who pays the piper calls the tune). The market economy cannot possibly be improved by central planning though. One might as well try to suspend gravity by diktat.

Cartoon by Bob Rich

 

Horror Show

Meanwhile, in the real world, Jim Clifton, head of the Gallup poll group, sees a horror show. Over the glorious years in which the Bernanke-Yellen team has managed the economy, he notes, the percentage of Americans who reply to his polls saying they are in the middle or upper-middle classes has fallen from 61% to 51%.

The adult population of the U.S. is about 250 million people. So, that’s 25 million people who have slipped out of the middle class during the time when the dream team has been engineering a “recovery.” These are people whose “lives have crashed,” says Clifton:

What the media is missing is that these 25 million people are invisible in the widely reported 4.9% official U.S. unemployment rate. Let’s say someone has a good middle-class job that pays $65,000 a year. That job goes away in a changing, disrupted world, and his new full-time job pays $14 per hour – or about $28,000 a year.

That devastated American remains counted as “full-time employed” because he still has full-time work – although with drastically reduced pay and benefits. He has fallen out of the middle class and is invisible in current reporting.

These “invisible Americans,” as Clifton calls them, pay a “disastrous” emotional toll. They see themselves falling behind. Whom do they blame? Themselves? Mexicans? Obama? One person they don’t blame is the one who has done them the most harm – Janet Yellen.

 

Social class self-identification in the US. There has been a noticeable decline in the percentage of people who still see themselves as members of the upper-middle and middle class.

 

Holding down interest rates, she stole away the most important bit of information in the system – the cost of capital. It was as though she took the stars from the night sky and hid away the needle from the compass; the economy was soon lost at sea.

Real capital investment declined. The real median household wages dropped back to 1973 levels. Productivity growth – the thing that lifts real wages – went into its longest slump since 1979.

 

Bottom Rung

Hardest hit were those marginal workers struggling to grab the lower rungs of the ladder. All of a sudden, the rungs were coated in the Fed’s grease.

Between 1947 and 1970, this group – the bottom fifth of the U.S. population – enjoyed a 3% annual growth in real disposable income.

As the EZ money regime of the 21st century worked its mischief, these annual increases disappeared.

 

It is no coincidence that the income share of top earners has begun to surge sharply not long after the adoption of a pure fiat money system. Unfettered credit expansion necessarily redistributes wealth and income to those who are among the earliest receivers of newly created money and/or those who are already asset-rich – click to enlarge.

 

The top 1%, however, had only gotten half the annual rates of increase between 1947 and 1970 of the lowest group, just 1.7% a year.

But after 2000, it made up for it – with income growth of 2.3% a year. Dammit Janet, says the chorus of “one percenters”, we love you.

 

via http://ift.tt/2dqzkIJ Tyler Durden

We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies.  Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday "P2P Meltdown Continues: LoanDepot's CDO Collapses Just 10 Months After Issuance"), is just one of the many unintended consequences. 

But, as Deutsche Bank's European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can't.  Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth.  This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative.  Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they're not driving incremental economic growth but clearly creating detrimental asset bubbles?

Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.

 

And accomodative policies can't be removed because expectations for future growth continue to decline. 

 

Meanwhile, DB points out that despite accommodative policies the US economy has now activated all 4 of their "recession warning indicators" a condition which has resulted in a recession every time it's occurred over the past 30 years with the exception of 1986.

 

But, of course, as we've noted many times, central banks are stuck with their accommodative policies because any efforts to unwind them would result in a simultaneous unwind of the equity bubble they've facilitated.

Central banks are running out of road. They would like to engineer higher nominal bond yields to protect bank profitability. However, without stronger growth and higher inflation expectations, the only way to do so (less QE, faster hikes) would also push up real bond yields. Given that the fall in real bond yields has been a key driver in boosting asset prices (pushing the European P/E 20% above its 10-year average and US HY credit spreads far below the level suggested by fundamentals), a rise in real bond yields would likely lead to a negative re-pricing of global risk assets. This would tighten financial conditions, further weaken growth and force central banks to ease policy again, leading to a renewed fall in nominal bond yields.

 

As Raedler points out, equities are more overvalued than at any other point since 1800 with the majority of the valuation premium explained by artificially low bond yields resulting in lower discount rates.

 

And, based on the thesis that Central Banks are stuck with their current policies, Raedler concludes that investors have no choice but to stick with the status quo of buying high dividend "bond proxies" and selling financials.

Remain cautious on equities: central banks’ willingness to underwrite low real bond yields has protected asset valuations even as global growth has slowed. Yet, with central banks unwilling to lower bond yields further (because of the impact on financial sector profitability), the upside from this factor is increasingly capped, while slower global growth means downside risk for equities. We maintain our Stoxx 600 year-end target of 325 (5% below current levels).

 

Remain overweight bond proxies: our basket of sustainable dividend payers and real estate should benefit if bond yields remain low due to the dynamics discussed above. Consumer staples should also benefit, though we’re concerned about the risk from EM FX exposure (40% of sales), with our FX strategists still seeing downside for the RMB.

 

Financials will likely continue to struggle if bond yields remain low. This should also been a problem for stocks with large pension deficits and Europe’s performance relative to global equities, which continues to track bond yields.

 

Which, of course, works until it doesn't.

via http://ift.tt/2dit5Fw Tyler Durden

We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies.  Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday "P2P Meltdown Continues: LoanDepot's CDO Collapses Just 10 Months After Issuance"), is just one of the many unintended consequences. 

But, as Deutsche Bank's European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can't.  Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth.  This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative.  Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they're not driving incremental economic growth but clearly creating detrimental asset bubbles?

Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.

 

And accomodative policies can't be removed because expectations for future growth continue to decline. 

 

Meanwhile, DB points out that despite accommodative policies the US economy has now activated all 4 of their "recession warning indicators" a condition which has resulted in a recession every time it's occurred over the past 30 years with the exception of 1986.

 

But, of course, as we've noted many times, central banks are stuck with their accommodative policies because any efforts to unwind them would result in a simultaneous unwind of the equity bubble they've facilitated.

Central banks are running out of road. They would like to engineer higher nominal bond yields to protect bank profitability. However, without stronger growth and higher inflation expectations, the only way to do so (less QE, faster hikes) would also push up real bond yields. Given that the fall in real bond yields has been a key driver in boosting asset prices (pushing the European P/E 20% above its 10-year average and US HY credit spreads far below the level suggested by fundamentals), a rise in real bond yields would likely lead to a negative re-pricing of global risk assets. This would tighten financial conditions, further weaken growth and force central banks to ease policy again, leading to a renewed fall in nominal bond yields.

 

As Raedler points out, equities are more overvalued than at any other point since 1800 with the majority of the valuation premium explained by artificially low bond yields resulting in lower discount rates.

 

And, based on the thesis that Central Banks are stuck with their current policies, Raedler concludes that investors have no choice but to stick with the status quo of buying high dividend "bond proxies" and selling financials.

Remain cautious on equities: central banks’ willingness to underwrite low real bond yields has protected asset valuations even as global growth has slowed. Yet, with central banks unwilling to lower bond yields further (because of the impact on financial sector profitability), the upside from this factor is increasingly capped, while slower global growth means downside risk for equities. We maintain our Stoxx 600 year-end target of 325 (5% below current levels).

 

Remain overweight bond proxies: our basket of sustainable dividend payers and real estate should benefit if bond yields remain low due to the dynamics discussed above. Consumer staples should also benefit, though we’re concerned about the risk from EM FX exposure (40% of sales), with our FX strategists still seeing downside for the RMB.

 

Financials will likely continue to struggle if bond yields remain low. This should also been a problem for stocks with large pension deficits and Europe’s performance relative to global equities, which continues to track bond yields.

 

Which, of course, works until it doesn't.

via http://ift.tt/2dit5Fw Tyler Durden

Submitted by Lance Roberts via realinvestmentadvice.com

In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy where more than 2/3rds of the growth rate is driven by consumption, an even bigger imbalance of the “have” and “have not’s” presents a major headwind.

I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve, it only benefited the small portion of the population with assets invested in the market. Cheap debt, excess liquidity and a buyback spree, led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 10%. Unfortunately, the other 90% known as “Main Street” did not receive many benefits.

 

This divide is clearly seen in various data and survey statistics such as the recent survey from National Institute On Retirement Security which showed the typical working-age household has only $2500 in retirement account assets. Importantly, “baby boomers” who are nearing retirement had an average of just $14,500 saved for their “golden years.”

 

Further evidence of the failure of ongoing Central Bank interventions to spark a broad economic recovery that lifted “all boats” is shown in the chart below. 4-0ut-of-5 working-age households have retirement savings of less than one times their annual income. This does not bode well for the sustainability of living standards in the “golden years.”

 

Here is the problem that is unfolding for investors going forward. While the mainstream financial press continues to extol the virtues of investing in the financial markets for the “long-term”, the assumptions are based on historical data that is not likely to repeat itself in the future.

Jeff Saut, Liz Ann Sonders, and others have continued to prognosticate the financial markets have entered into the next great “secular” bull market. As I have discussed previously, this is not likely to the be case based upon valuations, debt and demographic headwinds that are currently facing the economy.

Let’s set aside valuations and look strictly at the main driver of economic growth – the consumer.

Demographics Don’t Add Up
 
One of the big problems for the “secular bull market” story is the transition of a large mass of individuals heading into retirement years from accumulation to spending mode. The chart below shows the number of elderly versus young in millions in the U.S. through the last OECD survey ending in 2014.

 

The gap between the young and elderly population has shrunk dramatically in recent years as the demographic trends have shifted. Old people are living longer and young people are delaying marriage and children. This means fewer people paying into a social welfare system, while more or taking out. Of course, the burden on the social safety net remains the 800-lb gorilla in the room no one wants to talk about. But with the insolvency of the welfare system looming in less than a decade, I am sure it will become a priority soon enough.

Of course, as we will discuss in a moment, the problem is that while the “baby boom” generation may be heading towards retirement years, there is little indication a large majority of them will be actually retiring.  With a large majority of individuals being dependent on the welfare system in retirement, the burden will fall on those next in line.

Welcome to the “sandwich generation” when more individuals will be “sandwiched” between supporting both parents and children in the same household. It should be no surprise multi-generational households in the U.S. are at their highest levels since the “Great Depression.”

 

Given the sharp declines in fertility rates over the last 30-years, it is not surprising those over the age of 54 is now at its highest level, as a percentage of those between 25 and 54, in history.

 

This demographic problem is not going to be fixed anytime soon and has manifested itself in lower rates of household formations.  More importantly, the drag from the elderly on the financial system is going to be a much bigger problem than most currently expect.

Employment Is A Problem
 
But let’s get back to that “secular bull market” theory for a moment. The consumer currently makes up almost 70% of economic growth. More importantly, that consumption is what drives changes in private and fixed investment, imports, and exports all of which feed into the economic growth story. However, in order for the consumer to do their part, they need a “job.” Consumption can not occur without production coming first. In other words, if you don’t have a J.O.B. – you don’t have a P.A.Y.C.H.E.C.K. with which to spend.

Recent employment increases, while encouraging, have been little more than a function of population growth. As the population grows, incremental demand increases caused by that increase in population will create employment needs in areas most impacted by that population growth. This is why job formation has been primarily focused in retail, service and hospitality areas.

 

The Census Bureau and Bureau of Labor Statistics provide some fairly comprehensive data about employment that can help us understand the current state of labor force participation. Is it really just an issue of masses of “baby boomers” retiring?  Or is it something potentially more structural in nature.

Let’s start with the retirement of the boomer generation. In addition to the survey above, recent statistics show the average American is woefully unprepared for retirement. On average, 40% of American families are NOT saving for retirement, and of those who are, it is primarily about one year’s worth of income. Furthermore, important to this particular conversation, one-fourth of those at retirement age postponed retirement with only 18% being confident of having enough saved for retirement.

 

For the purposes of this analysis, I am going to exclude all of the “seasonal adjustments” that tend to be a focal point of many of the arguments and utilize a simple 12-month average to smooth the non-adjusted data.

With 24% of “baby boomers” postponing retirement, due to an inability to retire, it is not surprising the employment level of individuals OVER the age of 65, as a percent of the working-age population 16 and over, has risen sharply in recent years.

 

This should really come as no surprise as decreases in economic and personal income growth was offset by surges in household debt to sustain the standard of living. Notice the surge in 65-year and older employment corresponds with the decline of prosperity in the chart below.

During the last “secular bull market,” the “consumption function” was not driven by rising wages, higher interest rates, or strong economic growth. In reality, the economy has been in a weakening trend since 1980. The “illusion” of the last great secular bull market was driven almost entirely by the expansion of credit and financial engineering. In other words, people used credit to make up the difference between their standard of living and weakening levels of wage growth. We have now come to the end of that game.

 

The problem with the “secular bull market” thesis currently is solely the inability of the consumer to re-leverage another $11 Trillion to support economic growth. With corporations having levered back up to historic peaks to fund share buybacks, dividend payouts, and acquisitions, there is likely little fuel in the tank to support another massive leg higher in the equity markets.

What seems to be missed by the majority of analysis, in my opinion, is whether the economic viability for the average American has improved? The fact social benefits as a percentage of real disposable incomes has risen to an all-time record certainly suggests that it has not.

 

It would seem to me this would be a much more salient question considering the importance of the consumer on the economic equation and, ultimately, corporate profits and asset prices.

While the Fed has inflated asset prices to the satisfaction of Wall Street, as shown in the first chart above, it has done little to improve real employment or consumption for the vast majority of Americans.

However, my concern is that despite much hope the current breakout of the markets is the beginning of a new secular “bull” market – the economic and fundamental variables suggest that this may not yet be the case. Valuations and sentiment are elevated and interest rates, inflation, wages and savings rates are all at historically low levels. These are the variables which are normally seen at the end of secular bull market periods rather than the beginning. 

As stated above, the consumer, the main driver of the economy, will not be able to once again become a significantly larger chunk of the economy than today as the fundamental capacity to re-leverage to similar extremes is no longer available.

There is a huge difference between an organically driven secular bull market in stocks supported by underlying economic strength as opposed to an asset price inflation derived from direct liquidity injections. The former is sustainable, the latter is only sustainable as long as the ability to continue to “juice” the markets remain.

The last point is key. Central Bank interventions are finite. There is a limit to the number of bonds that can be swapped for cash before the credit market seizes entirely. There is also a limit to the ability of the world to operate within the context of a negative interest rate environment.

While stock prices can certainly be driven higher through more global Central Bank interventions, the inability for the economic variables to “replay the tape” of the 80’s and 90’s increases the potential of a rather nasty mean reversion in the future. However, it is precisely such a reversion that will create the “set up” necessary to start the next great secular bull market.

But as was seen at the bottom of the markets in 1942 and 1974, there were few individual investors left to enjoy the beginning of that ride. In the meantime, stop blaming “baby boomers” for not retiring – they simply can’t afford to.

via http://ift.tt/2dqsD9N Tyler Durden

There was one topic prominently missing from last night’s debate – Obamacare and soaring US healthcare costs- and with good reason: with most middle-class Americans suffering as a result of surging premiums, and even the Obama administration admitting, if only behind the scenes, that Obamacare needs a major overhaul, why tempt the presidential candidates with a topic that would sour the public’s mood about the defender of the status quo on the first debate.

After all, anyone who points out all that is wrong with Obama’s recovery is “peddling fiction.”

Unfortunately, its omission from the debate does not mean it is going away. On the contrary, as the following analysis from SocGen shows, what may now be the most important topic for not only the well-being but also the wallet of America’s middle class – as well as the presidential debates – is only going to get worse.

As SocGen writes, the jump in medical care services this year has been driven “in large part by soaring health insurance premiums, but more recently, both physician and hospital services prices have accelerated. In August, hospital services prices in particular soared, notching their largest increase since October 2015. In short, rising out-of-pocket payments and perhaps higher insurance reimbursements could continue to drive the medical care services index higher this year.”

The details:

In August, the core CPI climbed by 0.25%, with about 41% of that increase coming from a 1.0% surge in the cost of medical care, which was driven largely by a 0.9% rise in the medical care services gauge. Health insurance costs continued to accelerate, rising by 1.1% (the data are only on a not seasonally adjusted basis) in the month and by 9.1% yoy, the fastest rate of growth since December 2012. While in recent months rising health costs were mostly the result of health insurance, more recently, and especially in August, other components of the medical care services index have begun to accelerate.

Most of the 0.9% jump in medical care services in August was due to a 1.7% increase in the cost of hospital services. Hospital services accounted for about 46% of the increase in total medical care services, and they accounted for around 19% of the total rise in the core CPI. That is a hefty contribution from a component that makes up about 2.8% of the core index.

So what is driving these hospital services costs higher?

Like other components of medical care services, the hospital services index measures the cost of providing certain services to patients. That cost includes not only out-of-pocket payments by consumers but reimbursements to hospitals for services provided. Those reimbursements are set by contracts with health insurers.

Frankly, it is not clear exactly why the hospital services index surged as much as it did in August, but it may be the case that reimbursements to hospitals accelerated when new contracts were established this year. In fact, those contracts typically go into effect in January or July, so higher reimbursement rates set in July may have filtered into the CPI in August. On a yoy basis, the hospital services index increased 6.2% in August, the fastest rate of growth since May 2014.

In addition to higher reimbursements, consumers are paying more out of their own pockets. A shift to high-deductible health insurance plans in recent years means that consumers are contributing more to the cost of health care. According to a recent report by the Kaiser Family Foundation, approximately 29% of workers are in high-deductible plans, up from 20% two years ago. Moreover, worker contributions for health insurance for a single individual rose by 5.4% this year compared to a 0.9% drop in 2015. Thus, higher out-ofpocket payments by consumers could also be contributing to the acceleration in medical care services.

SocGen also notes that while it may be tempting to dismiss the August increase in hospital services as a temporary blip, data from the PPI also back up the recent jump. In August, the PPI index measuring hospital inpatient costs for privately insured individuals climbed by 1.0%, in line with the CPI’s inpatient index, which registered a  1.1% NSA advance. Meanwhile, the PPI index measuring hospital outpatient prices for those with private insurance jumped by 2.0% in August, somewhat higher than the CPI’s 1.4% NSA advance. Both the PPI and the CPI show noticeable increases in hospital services prices in August.

Worse, the geographic distribution of the pricing surge shows that some regions were impacted far more than others. In August, medical care services prices in the South surged by 1.2% NSA, the biggest increase in any August since at least 1990. Medical care services in the South region make up about a third of the national medical care services index, but the 1.2% jump in August made up 54% of the rise in the national medical care services measure. Again, the cause is not certain, but here again the Kaiser Foundation data provide a clue. Worker contributions to health insurance for a single person increased by 9.3% in 2016 compared to a 10.0% decline last year, so it seems that higher out-of-pocket payments may be in part to blame for the acceleration in the cost of hospital services.

In summary: given the rise in out-of-pocket payments by consumers, increases in medical care services will continue to push the medical care index higher in the coming months.

When? Recall that as we reported in May, many consumers won’t see actual insurance rates until the insurance marketplaces open Nov. 1 — a week before they go to the polls. Could the sticker shock from the Obamacare price increase be the real catalyst that forces millions of “undecided” Americans to vote for the candidate who promises to eliminate Obamacare?

 

 

via http://ift.tt/2dpIwxo Tyler Durden